Linlithgow Business Association

If dropping the VAT to 15% last year had the effect of stimulating the economy, what effect do we think the coming rise to 20% will have?

Hmmm. Is it a trick question? It doesn't seem like rocket science to me.

By the by, Cross Views recently learned that the software being used in the City of London's IT systems was created by out-of-work computer-programmers from NASA, so actually high finance really is rocket science...But I digress.

Sorry to be a harbinger of doom, but I predict that the rise in VAT to 20% will sound the death knell of the British economy in 2011. It will give me no pleasure to turn to turn to the next man in the dole queue in a year's time and say 'I told you so'.

"Come, come" I hear you say, "I'm trading business-to-business (B-2-B) and all my clients are VAT registered so the VAT rate is an irrelevance. Businesses all reclaim their VAT don't they? So, apart from a wee blip in the cash-flow, it will be business as usual when the rise takes effect in January won't it?"

But somewhere down at the sharp end of every supply chain some poor soul is slogging away priming the system's pump with business-to-consumer trading (B-2-C), and their business is about to take a severe beating.

Who's going to buy non-essential items at 20% VAT? Consumers will believe that if they can wait a few months the VAT rate will come back down again, so they'll wait. And they will believe that, no matter what anyone says. And in any case, there's going to be a growing black-market of the "No VAT, no receipts, no questions asked, no-comeback" variety ready and willing to take up the slack. So from January 2011 everyone making a legitimate living selling B-2-C will be facing a cliff-drop fall in their turnover. No question.

The biggest items will be hardest hit. Cars, home improvements, IT, entertainment and holidays. If you're involved in B-2-C in these sectors then you'd better have some contingency plans ready for a rainy day, because the storm clouds are coming and you're about to get soaked. And if you have B-2-B clients in these sectors, the domino effect means that you'll be next. No-one is immune. We're all doomed.

Meanwhile, on the plus side, its worth noting that the UK's current VAT rate of 17.5% is amongst the lowest in Europe. Denmark, Hungary, Norway and Sweden all have VAT at 25%. Most of the EU countries are between 19% and 22% including France, Holland, Belgium, Germany and Ireland. Spain's VAT goes up from 16% to 18% on 1 July (bad news if you're about to go there on holiday - sorry). The lowest rates in the EU include Cyprus, Luxembourg and the Azores which are still down at 15%, but for how long? [1]

Putting the UK tax up to 20% puts us on a level footing with Austria, Bulgaria, Czech republic, Estonia, Italy, Portugal and Slovenia, all also at 20%.

So maybe the change is permanent and consumers will eventually get used to it. Just cross your fingers and hope your business can survive in the meantime.

Cross Views

[1. Rates from Wikipedia, June 2010].

PS. If you want to choose your holiday destination by comparing VAT rates, Wikipedia gives some food for thought. Switzerland is good at 7.6%. Australia is only 10%. Canada and the Canary islands are at 5%. Meanwhile VAT in Iran is only 3%, if you're feeling like some adventure. Jersey is also at 3% - which might be a less-challenging option. Enjoy.